Loretta Mester, former Cleveland Fed president and CNBC contributor, shares her expertise on the tremors shaking the stock market after the Fed's quarter-point rate cut. She discusses why Powell is signaling fewer cuts in 2025, impacting inflation expectations and investor sentiment. The conversation dives into recent market reactions, highlighting the momentum trades that are faltering and the implications for year-end investing. Mester also unpacks the complexities of prolonged higher interest rates on various sectors, including tech and housing.
The Federal Reserve's decision to cut interest rates by 25 basis points was coupled with a cautious outlook, surprising market participants.
The indication of fewer rate cuts in 2025 led to significant declines in major indices and raised concerns about future earnings growth.
Investors are reassessing the valuations of high-growth tech stocks, anticipating a market correction due to increased borrowing costs.
Deep dives
Federal Reserve Rate Decisions Impact Markets
The Federal Reserve's recent decision to lower interest rates by 25 basis points was accompanied by a more cautious outlook that surprised market participants. The Fed signaled an expectation of only two more rate cuts in the coming year, rather than the three previously anticipated, leading to a significant sell-off in the stock market. Major indices like the Dow and S&P experienced substantial declines, with the Dow facing its longest losing streak since 1974. The shift in tone regarding future rate cuts raised concerns among investors about the overall economic outlook and inflation expectations.
Market Reactions to Economic Indicators
Yields on the 10-year Treasury note spiked, reflecting investor sentiment that the central bank's more hawkish approach indicates higher inflation concerns ahead. As the dollar index reached its highest level in over two years, market participants reacted by selling off growth stocks and other speculative investments, including Bitcoin and tech-focused equities such as Tesla and MicroStrategy. The movement in rates and the Fed's cautious stance raised questions about the sustainability of the growth seen in stock valuations over the past year. The prevailing fear is that sustained high yields will negatively impact earnings growth and investment sentiment.
Fed's Influence on Long-Term Economic Projections
The Federal Reserve's forward guidance emphasized patience and the need to monitor various economic indicators before making further cuts to interest rates. Officials acknowledged that their previous predictions regarding inflation and economic growth may require adjustments, particularly in light of potential policy changes by the incoming administration. The upward revisions in inflation forecasts for 2024-2026 indicated a recognition of risks associated with future economic growth and uncertainties stemming from trade policies. This led to a recalibration of market expectations regarding the planning for interest rate movements and their broader economic implications.
Small Caps and Financials Under Pressure
The market's reaction to the Fed's announcement was particularly harsh on small-cap stocks and financial sectors, which have historically been sensitive to interest rate changes. Small-cap stocks, represented by the Russell 2000, faced steep losses, reflecting investor concerns about liquidity and lending conditions amid rising rates. Financial stocks dropped significantly as market participants reevaluated the potential for profit margins in a higher rate environment, emphasizing the impact of these rates on loan demand. Analysts suggested that although current conditions seem negative, this may provide buying opportunities for investors looking for long-term growth in solid financials.
Reevaluation of High-Flying Tech Stocks
Investors are reassessing valuations of high-growth tech stocks following the Fed’s more hawkish stance, raising the specter of a market correction. Stocks that had previously benefited from low interest rates, such as those in technology and new digital currencies, are now facing headwinds due to increased borrowing costs. The call for profit-taking in previously hot sectors suggests a significant shift in investor sentiment as they anticipate slower growth rates. This suggests a potential return to fundamentals in stock selection, with an emphasis on earnings sustainability and realistic growth expectations in the face of higher rates.
Stocks selling off after the Federal Reserve slashed interest rates by a quarter point. Why Powell is indicating less rate cuts in 2025… and what it means for markets. Plus the momentum trades losing a ton of steam late in the day. What it all means for stocks into year-end.
